Tag Archives: crude oil

Will The Last 2-Weeks Of 2019 Be The Inverse of 2018?

Every professional investor knows that month-ending, quarter-ending and year-ending timestamps are important. Throughout the year, positions are hedged against these timestamps, and as a result, the year-ending option expirations almost always have the highest open interest. Generally, the higher the open interest the greater the volatility and financial risk.

Last December, in and around the final option expiration of the year, the S&P 500 fell by nearly 300 points. This dramatic decline coincided with a spike in market gamma as shown below. It is my view that this decline was furthered by forced selling by the put sellers who needed to sell the S&P 500 index to cut their losses. 

As we approach this year and the S&P 500 continues to grind higher, we may be facing the inverse of last year. Call sellers are beginning to feel more pain, as evidenced by a first-time spike in Forecast Gamma Neutral in my December 17th report.  While I am not saying that stocks will melt up through the remainder of the year, the possibility of that scenario playing out is looking more likely.  The chart below shows the relationship between the cash value in the SPX and the metric that I call Gamma Neutral.

SPX Value versus Prompt-Month Gamma Neutral

The Study of Market Gamma

There has been an increasing amount of attention to an “obscure” concept in the market called “gamma” over the past year.  Last November, Bloomberg published an article titled: Two Words Which Sent the Oil Market Plunging: Negative Gamma.  Since then, there have been an increasing number of market analysts – such as Nomura’s Charlie McElligott – who discuss the implications of gamma exposure in mainstream and other forms of financial media.

The study of “gamma” is akin to the study of market risk. When market gamma is relatively high, then financial risk is also high.  When market gamma is relatively low, then financial risk is low.  The study of gamma is based upon actual bets in the options markets—where hundreds of millions will exchange hands. In this way, the study of market gamma can be viewed as the ultimate “smart money” indicator.  And, the gamma smart money indicator has a definitive time stamp, its option expiration date.

Option expiration this week for the S&P 500 week will occur at 9:30am and 4:00pm December 20th.  At 9:30am, the SPX monthly options will expire, and at 4:00pm, the SPX, SPY and ES futures options will settle.  The SPX monthly options expiring at 9:30am have several orders of magnitude more value-at-risk than the other option expirations.

Whereas other analysts tend to report on cumulative gamma, I tend to focus on discrete, time-stamp specific gamma metrics.  The study of market gamma in all of its forms can provide context for mean-reversion events, Black Swan events, and intra-day volatility. 

Gamma Implications For Year-End 2019

The graph above shows regular mean-reversion of the S&P 500 value back to the levels of Gamma Neutral, and that value is currently around 3,070, a 120 point drop from current levels.  On the other hand, if call sellers in 2019 were to experience the same level of pain as the put sellers in 2018, then the level of the cash SPX would need to be at 3,295 today, a roughly 100 point increase from current levels.

So, from a “gamma” perspective alone, I will not be surprised to see a 100 point swing in SPX over the next week or so.  Of course, there are other market risks such as China trade and impeachment proceedings.  I will either be watching from the sidelines, or perhaps buy a straddle to profit from a big move in either direction.   

Should Tesla Bears Look To Hibernate

In May 2019, I published an article that outlined hope for TSLA bulls in which I suggested that $180 could provide an opportunity for a long position.  Since then, Tesla (TSLA) has established and strengthened along a new uptrend line.  There is now evidence of key resistance near the $260 and $280 levels.  The technical levels below show the key resistance trend lines, based upon weekly highs and lows since 2017. 

The prior five weeks saw TSLA trade in a narrowing technical triangle, and last week’s breakout, followed by this week’s strength, appears to be a breakout through the first level of technical resistance.  The current uptrend line is gaining strength and momentum.  If the price closes convincingly above $280 on a weekly basis, the Tesla bears may want to hibernate for the winter.  

Fundamentals and Markets

When it comes to valuing stocks and commodities, I call myself a “recovering fundamentalist.”  Having spent much of my career building private businesses, I am used to focusing primarily on EBITDA, discounted cash flows, and other fundamental metrics when evaluating stocks.  When it comes to TSLA, I tend to agree with the bears that TSLA’s share price is not justified by fundamentals.  In fact, TSLA’s market cap could be used as exhibit #1 to support the thesis that stocks are not valued upon fundamentals at all.

In the short run, stock and commodity prices are driven by human emotions (fear and greed) and subsequent money flows.  Fundamentals – positive or negative – can provide the narrative and longer-term trends by which investors become bullish or bearish.  I certainly don’t want to dissuade anyone from assessing TSLA weekly auto-deliveries or to research its accounting statements.  Nevertheless, this recommendation is based solely on my technical view of the current price action, regardless of Tesla’s bearish fundamental backdrop.   

The TSLA Options Market

The options market provides institutions and other large position holders an ability to hedge their TSLA exposure, whether the funds are invested long or short.  Since TSLA has a history of being difficult or expensive to short, the options market provides an outlet for those negative on the stock price. Due to the high demand, TSLA options tend to be liquid with high open interest.  There are many retail and institutional investors who short TSLA by buying puts.

The market makers who facilitate the options trading almost always hedge their exposure instantaneously and dynamically with delta-neutral strategies. 

What this means is the market makers perform combination trades to (theoretically) hedge their exposure to price while also profiting from options volatility.  The maximum profit for the market makers will occur if the price of the stock settles near the price level where their portfolio is delta neutral.  As a result, it can be instructive to track delta- and gamma-neutral levels in many different stocks, ETFs and commodities. For more on delta and gamma signals, you can download a quick presentation from this link.

Stock Price and Options Sentiment

Due to order flow, contract rollover, and hedging dynamics, there tends to be a convergence between stock prices and the point of delta- and gamma-neutral as option expiration comes nearer.  We can provide evidence for this convergence for many different stock indices, ETFs and commodities.  The chart below is TSLA stock price versus Delta Neutral and Gamma Neutral for the last several months.   Of particular note is the convergence between price (green) and Delta (red) and Gamma (blue) Neutral for each option expiry period (black square).

Not surprisingly, as TSLA broke through technical resistance last week, its Delta- and Gamma-Neutral levels followed price upward.  Our interpretation of this data is that the option market makers are also buying into the upward momentum.  Beyond the option expiration this coming Friday, additional data for November and December suggest that the options market will not necessarily be a headwind for continued advances in price.

The table below shows bullish put-call ratios and Gamma Neutral levels above $280 for the coming months.

Source: Viking Analytics

The basic theory behind the Delta Neutral and Gamma Neutral levels can be found by visiting our website www.viking-analytics.com.

Final Thoughts

Based upon the technical analysis and the Delta Neutral and Gamma Neutral levels, a long position in TSLA should be considered, preferably on a retest of $240. We would also advise limiting risk with a stop loss rule that would exit the trade on a weekly close below the key trend line.

This is for informational purposes only and is not trading advice.

Is Corn Ready To Pop Or Drop?

Corn volatility has spiked in recent weeks, fueled by weather-related delays in planting crops in the U.S.  The record amounts of rain and resulting flooding in the U.S. Midwest, which is bullish for corn and other crops, follows bearish tariff tensions with China which had pushed the July 2019 corn futures contract to all-time lows just two weeks ago.

Source: TradingView

On a weekly chart, we can see that this is the sixth time that the front-month (continuous) corn futures contract has spiked over $4 per bushel since late 2014.  In every prior instance, the price was short-lived, and corn quickly retreated towards the $3.50 price level.

Source: TradingView

The corn options market is very liquid, thus providing the opportunity for farmers, merchandisers, and other participants to hedge their exposure and lock in profits or costs.  The market makers who facilitate the options trade almost always hedge their exposure instantaneously and dynamically with delta-neutral portfolios.  The market makers perform combination trades to (theoretically) hedge their exposure to price while profiting from options volatility. It is these trades that provide with an insight that few follow.  

Option Expiration Sweet Spot

Due to order flow, contract rollover, and hedge dynamics, there tends to be a convergence between futures prices and the point of delta neutral as option expiration approaches.  We can provide evidence for this convergence for many different stock indices, ETFs and commodities.

Source: Viking Analytics

The chart below shows the regular convergence of the corn price towards market delta-neutral (black square) for the past several months.  Last Friday’s option expiration was the first of two option expirations that are priced off of the July futures contract; as a result, we had been informing our followers to focus on the June 21st option expiration rather than the just passed May 24th expiration.

If we call the point of Neutral Delta, the “sweet spot,” then the options market continues to have a sweet spot of $3.67/bushel for the June 21st option expiration.  Also, both the July and November dated option expirations have currently priced in sweet spots in the $3.60 to $3.75/bushel range.  These delta neutral levels change as the option participants adjust their wagers and hedges. Regardless, they portend a sharp drop in the price of corn.

Source: Viking Analytics

Gamma Signals Caution For Shorts

Neutral Delta and Neutral Gamma often trend with price.  Extreme divergences between Neutral Gamma and price (such as now) can also point towards short-covering events, and we have outlined this dynamic in two different articles: Perfect Storm in the S&P 500 (Seeking Alpha paywall) and Negative Gamma and the Demise of Optionsellers.com.   

Points to Consider

  1. The put-call ratios for the key option expirations are all in the 0.4 to 0.6 range.  This means that there are considerably more call options than put options.  If price continues to rise, then the call sellers may be forced to purchase corn futures to cover their exposure.
  2. At the intra-day price shown above, the total value of calls for the three expirations was $850 million greater than the value of puts.  This is an unusually large difference in value for the corn market.
  3. The basic theory behind the Neutral Delta and Neutral Gamma levels can be found by reading an introduction here: Introduction to Options Sentiment.

Current Trading Plan

The over-bought signal in corn has had my attention for over a week, and I have therefore been stalking a short trade.  On the other hand, the data also shows potential for a short squeeze, so I remain cautious, waiting for a confirmation that the upward momentum has dissipated.  It will be important to see how price reacts to planting progress over the next few weeks. 

This analysis is critical for those trading corn futures and options but should also be of interest to those focused on broader economic activity. The Midwest floods have taken a serious toll on many crops. Couple the potentially bad harvest along with the possible tariffs and the nation’s heartland may be adding to a string of already weakening economic growth

I look forward to any feedback below.

Disclaimer

This is for informational purposes only and is not trading advice.

Quick Take: Volatility Ahead in the Oil Market?

A week ago, I wrote an article discussing how the options markets can provide clues to future price direction and/or volatility in the crude oil market.  In particular, we addressed the question, “how can a trader spot these option clues in advance?”

This morning, we got a signal which may indicate volatility is in the cards again for crude oil.

As crude oil has continued its upward advance from late December, call sellers have become increasingly off-sides with their hedging and position taking. In fact, our measure of sentiment in the options market is now off the charts in the 99th percentile. Simply, all investors appear to be on the bullish side of the boat.   

We recently saw a similar situation play out in the natural gas market. When the level of market neutral gamma spiked out of its recent trading range (or it becomes incalculable), natural gas experienced a short squeeze and rallied substantially.

Current NYMEX crude oil options expire next Tuesday, April 16th.  While today’s level of neutral gamma is in range, we have forecasted that the level of market neutral gamma will spike on Sunday night – unless market conditions change.  This forecasted spike is shown in the graph below (blue line).

Source: Viking-analytics.com

What Does it Mean?

The safest conclusion to arrive at is to expect volatility ahead.  The market may experience a form of a short squeeze as options traders scurry to cover their off-sides net short.  Or, the market will correct lower towards our calculated Price Magnet in the low $60 range.  Based on our research, we would not be surprised to see a $5 move in either direction by the end of next week. 

I look forward to any feedback on these concepts in general, or the oil market in particular.

Erik Lytikainen, the founder of Viking Analytics, has over twenty-five years of experience as a financial analyst, entrepreneur, business developer, and commodity trader. Erik holds an MBA from the University of Maryland and a BS in Mechanical Engineering from Virginia Tech. You can see more of his work at: www.viking-analytics.com.

Bloomberg, Greeks and the Crude Oil Market

In November 2018, Bloomberg published an article entitled Two Words That Sent The Oil Market Plunging: Negative Gamma.  The article opens with this paragraph:

As oil suffered its biggest one-day slump in three years, it wasn’t OPEC or President Donald Trump that was shaking the market. Instead, trading desks were abuzz with chatter of “negative gamma.”

The article then continues by saying that this “obscure concept begins on the options desks of Wall Street” and includes an explanation of why producers buy puts to hedge their production and also some of the risks involved in being on one side or another of this trade.  

Since the Bloomberg article was written largely as a post-mortem, the question retail traders might ask themselves is: “how can I spot this kind of aberration in advance?”  The article does not provide a definitive answer to this puzzle, however we can provide some clues.

Option Market Imbalance

On October 3, 2018, WTI crude oil hit a 2018 settlement high of $76.40 per barrel.  At that time the NYMEX WTI options market was pricing in an October 17th option expiration settlement value in the low $70s and a November 14th option expiration settlement value in the low $60s as shown below in blue and red(and as published in our daily report).

Source: Viking-analytics.com

Prior to the sell-off in crude oil which began on October 4th, the levels of delta- and gamma-neutral provided a reliable point of mean-reversion for the WTI futures price for at least the preceding four months. In the chart above this is shown as the oil price (green) traded at the model magnet (black square) which is predicted by neutral delta and gamma. To add to the ammunition, the November 14th option expiration was for the December futures contract, which, as the anchor and/or primary contract for many producer hedges, increases the volume of the particular contract.

To simplify the concept, we can think about the gamma imbalance as follows:  producers had locked in a significant amount or sold a significant amount of crude oil in the low $60s – either by selling call options or by buying put options.  These trades created pressure for the order flow in both the futures and options markets to mean-revert to this lower level. Our charts clearly showed this massive imbalance in the stark difference between where the price of oil was (green line) and where delta and gamma (red and blue) implied it would be in the future.

In hindsight, the crude oil market breached $60 and then $50 per barrel level to the downside. While we will never know the ultimate catalyst that sparked the sharp selloff, both Bloomberg and I believe that this massive imbalance played a role.

Order Flow in The Age of The Machines

The majority of financial market trading is performed by machines.  Computer algorithms are designed to arbitrage and hedge the markets along many different time frames.

As market makers and large traders create positions, they will often arbitrage and hedge with delta-neutral portfolios.  These portfolios are instantaneously and dynamically adjusted in micro-seconds. 

As option expiration approaches, the computer algorithms must unwind and roll forward their delta hedges.  This creates order flow that tends to compress market delta and market price.

The price of a stock index or commodity will often revert to the point of delta-neutral.  The mean-reversion is seen above as the relationship between the red and green lines on the option expiration date, which we call the Final Price Magnet.

The algorithms which actively and instantaneously hedge delta must also monitor their gamma exposure.   When gamma spikes, covering events may occur, such as occurred in the natural gas market (Oct 2018) and in the S&P index (Dec 2018). 

The example provided in this article is extreme but it is worth highlighting as it shows the value of tracking market delta and gamma. The financial media can be quick to assign blame or credit for every squiggle up and down in the financial markets. Sometimes the media is correct, but frequently there are advance clues that professional traders understand better than the media.

Understanding what drives the market makers can improve your odds of successful trading.  The Price Magnet Report is a tool that considers order flow and open interest in the options markets to calculate expected mean-reversion in and around the option expiration date.  Our daily report includes over a dozen key stock indices and commodities.  This daily report provides intelligence that Bloomberg says is meaningful, but you can’t access this information on CNBC, or even on the Bloomberg terminal itself.   

I look forward to any feedback on these concepts in general, or on the oil market in particular.

Erik Lytikainen, the founder of Viking Analytics, has over twenty-five years of experience as a financial analyst, entrepreneur, business developer, and commodity trader. Erik holds an MBA from the University of Maryland and a BS in Mechanical Engineering from Virginia Tech. You can see more of his work at: www.viking-analytics.com.

Cartography Corner – April 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of March

Palladium Futures  

We will begin with a review of Palladium Futures during March 2019. In our March 2019 edition of The Cartography Corner, we wrote the following, with emphasis given to bolded excerpts:

In isolation, monthly support and resistance levels for March are:

  • M4             1861.5
  • M3             1703.1
  • M1             1655.2
  • PMH          1525.8
  • Close         1501.5
  • M2          1416.3             
  • MTrend    1306.7
  • PML           1303.2                       
  • M5             1210.0

Active traders can use 1525.8 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 1 below displays the daily price action for March 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  During the first eleven trading sessions of March, the market price oscillated within a 68.5-point range.  The price remained below February’s high price at PMH: 1525.8.

On March 18th, the market price traded and settled above February’s high price.  Over the next three trading sessions, Palladium Futures achieved marginally higher prices, with the high settlement-price for the month of March achieved on March 20th and the high price reached March 21stThe decline that followed was truly awe-inspiring.

Over the following five trading sessions, the market price declined 251.2 points or 15.9% on a settlement basis.  The decline halted at our clustered-support area at MTrend: 1306.7 / PML: 1303.2.  The final trading session saw Palladium Futures bounce marginally from that clustered-support area.  In our judgment, the correction of the parabolic rise in Palladium futures is in its early stages.

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during March 2019.  In our March 2019 edition of The Cartography Corner, we wrote the following, with emphasis given to bolded excerpts:

In isolation, monthly support and resistance levels for March are:

  • M4              3189.50
  • M2              2923.00
  • M1              2919.00
  • M3              2865.00            
  • PMH           2814.00        
  • Close          2784.75
  • PML            2680.75        
  • M5              2652.50       
  • MTrend      2640.42

Active traders can use 2814.00 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for March 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first six trading sessions of March were spent with the market price exceeding (intra-day, March 4th) and subsequently declining hard (approximately 100 points) off our isolated upside-pivot level at PMH: 2814.00.

Three sessions later, on March 13th, the market price traded and settled above our isolated upside-pivot level at PMH: 2814.00.  The following six trading sessions saw E-Mini S&P Futures ascend to our isolated resistance level at M3: 2865.00.  The high price for the month was achieved on March 21st at the price of 2866.00.

The final six trading sessions were spent with the price declining back to, and oscillating around, February’s high price at PMH: 2814.00.

Figure 2:

 


April 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Current Settle         2837.75       
  • Daily Trend             2819.22
  • Weekly Trend         2817.56       
  • Monthly Trend        2729.08       
  • Quarterly Trend      2718.86

As can be seen in the quarterly chart above, the impressive twelve-quarter uptrend ended in 4Q2018.  As we have stated many times, of all the levels included in our output, Quarterly Trend is the most important, because it is more secular in nature.  The market price settled back above Quarterly Trend in 1Q2019, leaving the market in “Consolidation”.

Stepping down one level in time-period, the monthly chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have also been “Trend Up” for three weeks.

Within the context of the market price relative to the trend levels and the relative positioning of the trend levels to one another, technical analysis of E-Mini S&P 500 Futures is bullish.   

We have written extensively about our anticipation of a two-month high being needed in E-Mini S&P 500 Futures.  We anticipated it occurring in the month of March and it was realized during the second trading session of the month.  The rally from the December 2018 low has completed its objective.

We continue to view this time window and price area as the last and best opportunity to sell longs (get short), anticipating an extended decline in both time and price.  Based upon historical occurrences, we will know in the next month or so if we are correct in our timing.

We recognize the risks from here as binary: either the market is going to decline substantially or it will achieve new all-time highs.

Support/Resistance:

In isolation, monthly support and resistance levels for April are:

  • M4              3051.25
  • M1              2918.00
  • M3              2890.75
  • PMH           2866.00
  • Close          2837.75        
  • M2              2772.25
  • MTrend     2729.08         
  • PML            2726.50        
  • M5             2639.00

Active traders can use 2866.00 as the upside-pivot, whereby they maintain a long position above that level.   Active traders can use 2772.25 as the downside-pivot, whereby they maintain a flat or short position below it.

Ultra-Long Bond Futures

For the month of April, we focus on Ultra-Long Bond Futures.  We provide a monthly time-period analysis of UBM9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Current Settle        168-00          
  • Daily Trend            167-29
  • Weekly Trend        164-19          
  • Monthly Trend       162-08          
  • Quarterly Trend     159-12

As can be seen in the quarterly chart above, Ultra-Long Bond Futures are in “Consolidation”.  With a quarterly settlement above 159-12 this quarter, Ultra-Long Bond Futures will be “Trend Up”Stepping down one level in time-period, the monthly chart shows that Ultra-Long Bond Futures have been “Trend Up” for four consecutive months.  Stepping down to the weekly time-period, the chart shows that Ultra-Long Bond Futures have been “Trend Up” for four weeks.

Technical analysis of Ultra-Long Bond Futures is unequivocally bullish.  Having said that, there is one technical factor that gives us caution.  The condition was met in March that makes us anticipate a 2-month low within the next four to six months.

Support/Resistance:

In isolation, monthly support and resistance levels for April are:

  • M4             178-25
  • M3             176-13
  • M1             175-00
  • PMH          168-30
  • Close         168-00
  • MTrend    162-08            
  • PML          158-03
  • M2            157-03                       
  • M5            153-10

Active traders can use 168-30 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

It is worth noting that it is somewhat unusual for stocks and bonds to be as well correlated in price as we saw in the first quarter. The stock market rally and accompanying sharp decline in yields, along with some yield curve inversions, are implying two different fundamental economic stories. We believe that if you can determine which one is right you will have much success over the coming few months.  We caution ourselves regarding the delicate balance between conviction and stubbornness with the following:

Stubbornly maintaining a position based on fundamental analysis in the face of adverse technical indicators and an adverse price trend constitutes a quick method of running up substantial trading losses.  In short, do not ignore the technical action of the market no matter how fundamentally-oriented a trader you could be.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription, we are asking you to listen.

Cartography Corner – March 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of February

WTI Crude Oil Futures

We will begin with a review of WTI Crude Oil Futures during February 2019. In our February 2019 edition of The Cartography Corner, we wrote the following, with emphasis given to shaded excerpts:

In isolation, monthly support and resistance levels for February are:

  • M4             68.38
  • M3             62.17
  • M1             56.19
  • PMH          55.37
  • Close         53.79
  • MTrend     51.28             
  • M2             46.34
  • PML           44.35                         
  • M5             34.15

Active traders can use 56.19 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 51.28 as the downside pivot, whereby they maintain a short or flat position below it.

Figure 1 below displays the daily price action for February 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  During the first seven trading sessions of February, the market price declined to our isolated downside-pivot level at MTrend: 51.28.  However, that support level held and the price promptly began to rally.

Over the following five trading sessions, the price ascended to and closed above, our isolated upside-pivot level at M1: 56.19.  With February 19th’s settlement price of 56.45, the buy signal for active traders was given.

After achieving marginal-high-closing prices over the next three trading sessions, WTI Crude Oil Futures declined, and settled, below M1: 56.19.  The final three trading sessions were spent with the price ascending back to and closing above that level.

Active traders following our work completed two trades during the month, with one losing trade and one winning trade.  Using settlement prices, the resulting loss equaled 1.23%.      

Figure 1:

 

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during February 2019.  In our February 2019 edition of The Cartography Corner, we wrote the following, with emphasis given to shaded excerpts:

In isolation, monthly support and resistance levels for February are:

  • M4              3105.00
  • M3              2903.75
  • PMH           2709.00
  • Close          2704.50
  • MTrend      2631.83        
  • M1              2604.00
  • M2              2564.00       
  • PML            2438.50        
  • M5              2063.00

Active traders can use 2709.00 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for February 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first six trading sessions of February were spent with the market price trading on either side of our isolated upside-pivot level at PMH: 2709.00.  The buy signal for active traders was given on February 4th, with that session closing at 2721.25.  That position was closed on February 7th, with that session closing at 2704.00.

Three sessions later, on February 12th, the buy signal for active traders was given again.  The market never looked back, with the high price for the month achieved on February 25th at 2814.00.  For consistent readers of our work, 2814.00 should have significance (more on this follows).  The two-month high we have been anticipating since the December lows would have been achieved on any trade above that price.

The final three trading sessions were spent with the price drifting lower.

Active traders following our work completed two trades during February, with one losing trade and one winning trade.  Using settlement prices, the resulting gain equaled 0.83%.

Figure 2:


March 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend             2789.64       
  • Current Settle         2784.75
  • Weekly Trend         2748.14       
  • Quarterly Trend      2710.78       
  • Monthly Trend        2640.42

As can be seen in the quarterly chart above, the impressive twelve-quarter uptrend ended in 4Q2018.  As we have stated many times, of all the levels included in our output, Quarterly Trend is the most important, because it is more secular in nature.  With one month remaining in the first quarter of 2019, we are keenly focused on whether the market price will settle the current quarter back above Quarterly Trend (2710).

Stepping down one level in time-period, the monthly chart shows that E-Mini S&P 500 Futures are now in “Consolidation”, after having been “Trend Down” for three months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P Futures have been “Trend Up” for eight weeks.

Technical analysis of E-Mini S&P 500 Futures suggests that the market has turned lower for a sustained downtrend, despite this rally off the December 2018 low.

In our January 2019 edition we wrote, “Currently, we anticipate a 2-month high…”  The time window for that 2-month high is in the next two months if February’s matching of December’s high at 2814.00 does not qualify.  We are not aware of a 2-month high being matched exactly in our historical data across markets.  Regardless, in order to achieve it in March, the market price would need to trade above 2814.00.

The market does not need to immediately “crash” after the 2-month high is achieved.  Although most historical occurrences have seen a prompt reversal into the next leg of the larger decline, there are instances where the market has held steady (pushed slightly higher) for a month or two after the 2-month high was achieved.  Please review the analysis in our January 2019 edition of The Cartography Corner.

Support/Resistance:

In isolation, monthly support and resistance levels for March are:

  • M4              3189.50
  • M2              2923.00
  • M1              2919.00
  • M3              2865.00
  • PMH           2814.00        
  • Close          2784.75
  • PML            2680.75        
  • M5              2652.50       
  • MTrend      2640.42

Active traders can use 2814.00 as the pivot, whereby they maintain a long position above that level and a flat or short position below it. Given the track record of the 2-month high, we suggest strong discipline below 2814.

Palladium Futures

For the month of March, we focus on Palladium Futures.  We provide a monthly time-period analysis of PAM9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Current Settle        1501.5          
  • Daily Trend            1500.1
  • Weekly Trend        1395.5          
  • Monthly Trend       1306.7          
  • Quarterly Trend     1033.6

As can be seen in the quarterly chart above, Palladium Futures are in “Consolidation”.  With a quarterly settlement above 1033.6 this quarter, Palladium Futures will be “Trend Up”Stepping down one level in time-period, the monthly chart shows that Palladium Futures have been “Trend Up” for seven consecutive months.  Stepping down to the weekly time-period, the chart shows that Palladium Futures have been “Trend Up” for nine weeks.

Technical analysis of Palladium Futures is unequivocally bullish.  In fact, Palladium is currently the strongest market of all markets that we analyze.  Having said that, there are two technical factors that give us caution.  The condition was met in January that makes us anticipate a 2-month low within the next three to five months.  Also, the slope of the Monthly Trend since the rally started in August 2018 is increasing at a sharply-increasing rate.  The ascent is taking on a parabolic nature.

Support/Resistance:

In isolation, monthly support and resistance levels for March are:

  • M4             1861.5
  • M3             1703.1
  • M1             1655.2
  • PMH          1525.8
  • Close         1501.5
  • M2          1416.3             
  • MTrend    1306.7
  • PML           1303.2                       
  • M5             1210.0

Active traders can use 1525.8 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight to many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription, we are asking you to listen.

To Buy or not to Buy : Thoughts on Crude Oil

When a team manages a portfolio, as we do at RIA Advisors, investment decisions can be complicated by differing viewpoints. While such debates are frustrating, opposing opinions help make the case to trade or not to trade stronger, which tends to lead to better results.

Currently, Lance Roberts and Michael Lebowitz are discussing the merits of adding crude oil and/or energy stocks to our portfolios. In this article, we share with you part of the debate. We lead with Michael who, while not yet committed, is watching on a key technical signal before pushing for a long position in crude oil and/or energy stocks. The signal is based on the Commitment of Traders Report (COT) published by the Commodity Futures Trading Commission (CFTC). Lance’s opinion, following Michael’s, is based on a fundamental outlook as well as more traditional technical indications. 

Michael’s View

The weekly COT reports details the open interest of a wide variety of commodity futures contracts and options on those contracts. Open interest refers to the net long or short position for each contract or option. Total open interest always nets to zero as there must be a seller for every buyer. To make the report worthwhile the CFTC segments data by the business purpose of each firm or individual that has an open position. The four categories are as follows: Producers, Banks/Brokers, Managed Money, and Other. The net positions of each account type provide valuable information that helps traders understand why a contract is trading the way it is, but also how it might trade in the future.

Many traders pay particular attention to the managed money accounts as they tend to be the marginal transactors, and therefore price setters, in many futures/commodities markets. Frequently, when a large number of managed money accounts are positioned similarly, contract prices ultimately tend to reverse. Such a situation brings to mind the adage about everyone being on one side of a boat.

Currently, the crude oil market is nearing a situation where managed money accounts are relatively bearish. Per the latest COT report for WTI Crude Oil, net longs (the difference between open long and short positions) are at +277,211 contracts. These managers are still net long which can be construed as bullish, but as shown on the graph below, the number of net longs are small in context with COT data since 2014.

As shown by the dotted red line, the current level of net long positioning by managed money accounts is the lowest since 2016. Given that many managed money accounts tend to chase momentum, and oil has fallen 30% since October 2018, the relatively low net long number is not a surprise.

Chasing momentum can be very profitable until it’s not.

When you are trading based on momentum its vital to recognize when the underlying instrument is in an overbought or oversold condition. Conditions can certainly stay overbought or oversold, but at some point, the proverbial boat tips and everyone scurries to the other side. Those accurately anticipating these shifts can profit handily.

The graph below plots the correlation between oil and managed money net positions.

,While some degree of correlation is obvious, it’s not apparent from the graph how well one would do trading solely based on a small net long position. To help, we provide the table below showing price returns for various net position levels over different holding periods. We do this for crude oil and the popular energy ETF XLE, which at times is well correlated to oil. The green highlighted cells represent the best opportunity in terms of length of trade and the net long position.

Unfortunately, COT data is still delayed due to the government shutdown. The CFTC will be reporting twice a week until they catch up. As of early January 2019, the net long position was 277,211, a sharp decline from over 700,000 a year ago.

Lance’s View

Two things are worth considering about the current trend and direction of oil.

The first is simply the long-term dynamics of what is happening with oil.

Currently, the global economy is slowing, and the demand side of the equation is failing to keep up with the growing supply of oil. Despite cuts from OPEC, Russia, and others, the “shale revolution” is adding to supply faster than the cuts to production can account for.

Given that oil is a highly sensitive indicator relative to the expansion or contraction of the economy, and that oil is consumed in virtually every aspect of our lives, from the food we eat to the products and services we buy, the demand side of the equation is a tell-tale sign of economic strength or weakness.

The chart below combines interest rates, inflation, and GDP into one composite indicator to provide a clearer comparison to oil prices. One important note is that oil tends to trade along a pretty defined trend…until it doesn’t. Given that the oil industry is very manufacturing and production intensive, breaks of price trends tend to be liquidation events which have a negative impact on the manufacturing and CapEx spending inputs into the GDP calculation.

As such, it is not surprising that sharp declines in oil prices have been coincident with downturns in economic activity, a drop in inflation, and a subsequent decline in interest rates.

Since October of 2018, the price of oil has signs of global economic weakness have grown. Despite the occasional rally, it’s hard to see the outlook for oil is encouraging on both fundamental and technical levels.

The charts for WTI remain bearish, while the fundamentals remain basically “Economics 101: too much supply, too little demand.” The parallel with 2014 is there if you want to see it.

The current levels of supply potentially create a longer-term issue for prices globally particularly in the face of weaker global demand due to demographics, energy efficiencies, and debt.

Many point to the 2008 commodity crash as THE example as to why oil prices are destined to rise in the near term. The clear issue remains supply as it relates to the price of any commodity. With drilling in the Permian Basin expanding currently, any “cuts” by OPEC have already been offset by increased domestic production.

As noted in the chart above, the difference between 2008 and today is that previously the world was fearful of “running out” of oil versus worries about an “oil glut” today. The issues of supply versus price become clearer if we look further back in history to the last crash in commodity prices which marked an extremely long period of oil price suppression as supply was reduced.

The fundamental backdrop doesn’t look to improve anytime soon which brings us to the purely technical aspect of oil.

The graph below compares the price of crude oil and energy stocks. As you can see, there is a high correlation between the two. This is not surprising given the impact of the commodity on revenues and profitability for these companies.

From a purely technical perspective, the price of oil remains confined below the 1-year, 2-year, and 5-year moving averages. What this suggests is that prices are going to remain under downward pressures which will likely correspond with the onset of a recession in the next 12- to 24-months.

Again, this is a weekly chart, so things move a bit more slowly. In the very short-term oil is oversold enough, and as Mike noted above, there are certainly catalysts which could push both oil prices and energy-related stocks higher in the short-term.

However, the longer-term backdrop remains negative and corresponds highly with a late stage economic cycle.

As always, “timing is everything.”

Trade Recommendation

Because of the rather weak technical and fundamental outlook for oil that Lance laid out in conjunction with our agreement that economic growth will slow considerably over the next few quarters, we have agreed that patience is the best course of action for now. However, we have not ruled out taking a long position in oil, with a tight stop, if the net long managed money position drops below 225,000.

We will keep you posted if we take any action in oil or energy companies.

Key Charts To Watch As Crude Oil’s Bust Continues

Crude oil’s plunge continued on Tuesday due to fears of a growing glut and economic slowdown. West Texas Intermediate crude oil fell 7.3% to $46.24 a barrel, while Brent crude oil fell 5.6% to $56.26 a barrel. Crude oil’s ongoing bear market confirms the warning I published on November 6th called “Is A Crude Oil Liquidation Event Ahead?”

After today’s drop, West Texas Intermediate crude oil is down approximately 40% since early-October:

WTI Crude Daily

Brent crude oil is down approximately 35% since early-October:

Brent Crude Oil Daily

In recent weeks, WTI crude oil broke below its uptrend line that started in early-2016 and the key $50 level, both of which are important technical breakdowns. The next price targets to watch are $40, then $30, and so on.

WTI Crude Weekly

Brent crude oil recently broke below both its uptrend line and its key $60 level, which is a bearish omen that puts $50, $40, and $30 into play as the next price targets/support levels to watch.

Brent Weekly

As I discussed a few weeks ago, crude oil is plunging because it is pricing in much slower economic growth and a likely recession, as well as growing inventories. I am particularly worried about plunging oil prices because I believe that it is going to pop the shale energy bubble that I have been warning about for years.

Here’s what I wrote in Forbes in 2014:

I am also growing increasingly concerned that the U.S. shale energy boom is actually another post-2009 economic bubble (it would be a part of the commodities bubble). In a zero-percent interest rate environment like we are currently experiencing, any economic boom can devolve into a bubble. Shale energy extraction is a very capital-intensive business that relies heavily on cheap credit to survive. Shale oil wells experience much faster decline rates than conventional oil wells, which means that energy companies must keep drilling at a furious pace just to maintain their production – a very costly proposition that is typically funded by copious amounts of debt.

Here’s what I wrote in Forbes in September 2018, when I summarized the shale energy bubble:

U.S. shale energy boom/energy junk bonds: This boom/bubble is closely related to the corporate debt bubble discussed above. Extracting oil and gas from shale via fracking is extremely capital-intensive and would not be feasible in a normal interest rate environment. Thanks to the artificially low interest rate environment since the Great Recession, the shale energy industry’s net debt surged to $200 billion in 2015 – a 300% increase from 2005. Rising interest rates and the bursting of the corporate debt/junk bond bubble will cause a major bust in the shale energy industry.

The oil price plunge and overall rising interest rate environment is causing high yield or “junk” bonds to sink. The chart below shows that the HYG high yield corporate bond ETF recently broke below a key technical level known as a neckline, which is a signal that further bearish action is likely ahead (which means that junk bond yields will rise). I believe that this is yet another sign that the shale energy bubble is at risk of popping.

HYG

For now, I am watching $40 and $50 a barrel as the next price targets in WTI and Brent crude oil. The HYG high yield corporate bond ETF is likely to gun for its early-2016 lows in the course of this energy bust.

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Why Oil’s Crash Will Cause A Shale Energy Bust

Despite this being a low-volume holiday week, crude oil continues to plunge. West Texas Intermediate (WTI) crude oil is down $3.69 or 6.75% and Brent crude oil is down $3.60 or 5.75% today alone, which further confirms the concerns I had when when I wrote the article “Is A Crude Oil Liquidation Event Ahead?” on November 6th. In that piece, I warned that WTI crude oil’s technical breakdown below its key $65 level would likely lead to even more bearish action, which could then cause speculators or the “dumb money” to violently liquidate their large bullish position of nearly 500,000 net futures contracts. In today’s update, I will show the next key technical levels to watch and discuss the economic implications of crude oil’s crash of the past two months.

The daily chart shows how WTI crude oil fell by over $26 per barrel or 34% since early October:

WTI Crude Oil Daily

Brent crude oil fell by over $28 per barrel or 33% since early October:

Brent Crude Daily

WTI crude oil keeps slicing below important technical levels: $60, $55, and the uptrend line that began in early-2016, which represents a very important and concerning technical breakdown. The next major support level to watch is $50; if WTI crude oil breaks below $50 in a convincing manner, it will likely try to gun for $40, then $30, and so on.

WTI Crude Oil Weekly

Brent crude oil sliced below its $70 and $60 support levels along with the uptrend line that started in early-2016, which is a very bad omen that increases the probability of further bearish action provided it isn’t negated by a close back above this level.

Brent Crude Oil Weekly

As I’ve been pointing out since the start of this year, crude oil futures speculators or the “dumb money” (the red line under the chart) have built a massive long position in WTI crude oil of just under 500,000 net futures contracts. There is a very real risk that these speculators will be forced to liquidate if the sell-off continues, which would greatly exacerbate the sell-off.

Dumb Money

Why is crude oil selling off so sharply? There are a number of reasons, but the core reason is that global recession risk is rising (which is why the stock market is selling off along with oil). According to the Ned Davis Research chart below, global recession risk is now above 70.

What does that mean?

“Readings above 70 have found us in recession 92.11% of the time (1970 to present).  Several months ago, the model score stood at 61.3.  It has just moved to 80.04.  Expect a global recession.  It either has begun or will begin shortly.  Though no guarantee, as 7.89% of the time since 1970 when the global economic indicators that make up this model were above 70, a recession did not occur.” – Stephen Blumenthal

Global Recession Risk

In September, I wrote a popular Forbes piece called “How Interest Rate Hikes Will Trigger The Next Financial Crisis” in which I showed how historic recessions, banking, and financial crises have occurred after interest rate hike cycles (the chart below is from that piece). I believe that dangerous bubbles have formed in emerging markets, U.S. stocks, the shale energy industry/energy junk bonds, tech startups, and other industries and countries after the Great Recession, and that rising interest rates are going to pop those bubbles and cause yet another financial and economic crisis.

Fed Funds Rate

I am particularly worried about plunging oil prices because I believe that it is going to pop the shale energy bubble that I have been warning about for years.

Here’s what I wrote in Forbes in 2014:

I am also growing increasingly concerned that the U.S. shale energy boom is actually another post-2009 economic bubble (it would be a part of the commodities bubble). In a zero-percent interest rate environment like we are currently experiencing, any economic boom can devolve into a bubble. Shale energy extraction is a very capital-intensive business that relies heavily on cheap credit to survive. Shale oil wells experience much faster decline rates than conventional oil wells, which means that energy companies must keep drilling at a furious pace just to maintain their production – a very costly proposition that is typically funded by copious amounts of debt.

Here’s what I wrote in Forbes in September 2018, when I summarized the shale energy bubble:

U.S. shale energy boom/energy junk bonds: This boom/bubble is closely related to the corporate debt bubble discussed above. Extracting oil and gas from shale via fracking is extremely capital-intensive and would not be feasible in a normal interest rate environment. Thanks to the artificially low interest rate environment since the Great Recession, the shale energy industry’s net debt surged to $200 billion in 2015 – a 300% increase from 2005. Rising interest rates and the bursting of the corporate debt/junk bond bubble will cause a major bust in the shale energy industry.

The oil price plunge and overall rising interest rate environment is causing high yield or “junk” bonds to sink. The chart below shows that the HYG high yield corporate bond ETF recently broke below a key technical level known as a neckline, which is a signal that further bearish action is likely ahead (which means that junk bond yields will rise). I believe that this is yet another sign that the shale energy bubble is at risk of popping.

High Yield Bonds

Fund manager Jeff Gundlach said that he expected that the Fed would raise rates “until something breaks.” There is a good chance that one of the first things that broke and continues to break is crude oil prices and the shale energy bubble. This has very serious implications because it is one of the most important drivers of economic activity and job creation in the U.S. since the Great Recession. Society is going to be taught the lesson that cheap credit and flooding the economy and financial system with liquidity leads to bubbles rather than sustainable economic booms.

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Here’s What To Watch As Oil’s Liquidation Sell-Off Continues

Last week, I wrote a piece in which I warned about the risk of a sharp liquidation sell-off in the crude oil market as speculators are forced to jettison their massive 500,000 futures contract long position. Since then, crude oil continues to sell off very hard and was down nearly 8% on Tuesday alone. Crude oil is an economically sensitive asset and may be selling off as it prices in the rising risk of a recession in the not-too-distant future.

West Texas Intermediate (WTI) crude oil broke below its key $65 support level at the start of this month and tested the $55 support level during Tuesday’s sell-off. There is a good chance of a short-term bounce at the $55 level. If WTI crude oil eventually closes below the $55 support level in a decisive manner, it would likely foreshadow further weakness.

Crude Oil Daily

The weekly chart shows how WTI crude oil recently broke below its uptrend line that started in early-2016 (just like the S&P 500 did), which is a worrisome sign.

Crude Oil Weekly

As I’ve been pointing out since the start of this year, crude oil futures speculators or the “dumb money” (the red line under the chart) have built a massive long position in WTI crude oil of just under 500,000 net futures contracts. There is a very real risk that these speculators will be forced to liquidate if the sell-off continues, which would greatly exacerbate the sell-off.

Crude Oil Monthly

After going sideways for five months, the U.S. dollar has recently resumed its rally that started in the spring. On Monday, the U.S. Dollar Index broke above its key 97 resistance level that formed at the index’s peak in August. If the index manages to stay above this level, it may signal even more strength ahead. The dollar is strengthening because U.S. interest rates have been rising for the past couple years, which makes the U.S. currency more attractive relative to foreign currencies.

The U.S. Dollar Index is very important to watch due to its significant influence on other markets, particularly commodities and emerging market equities. Bullish moves in the U.S. dollar are typically bearish for commodities (including energy and metals) and emerging markets, and vice versa. If the U.S. Dollar Index continues to rise after Monday’s breakout, it would spell even more pain for commodities and EMs.

Dollar

For now, I am watching how WTI crude oil acts at its key $55 support level and if the U.S. dollar’s Monday breakout holds.

If you have any questions about anything I wrote in this piece or would like to learn how Clarity Financial can help you preserve and grow your wealth, please contact me here.

Is A Crude Oil Liquidation Event Ahead?

West Texas Intermediate (WTI) crude oil is down approximately 20% since the start of October, putting it into bear market territory. Crude oil’s rout is due largely to reduction of the severity of the sanctions placed by the U.S. on Iran as well as the financial market and economic fears that have resurfaced in the past month.

WTI crude oil broke below the key $65 per barrel level, which is now a resistance level, which is a sign of technical weakness. Crude oil would need to close back above this level in a convincing manner in order to negate this breakdown.

Crude Oil Daily

The weekly crude oil chart shows how WTI crude oil broke below its uptrend line that started in mid-2017. If the breakdown remains intact, the next key level and price target to watch is the $55 support level that formed at the late-2016/early-2017 highs.Crude Oil Weekly

As I’ve been pointing out since the start of this year, crude oil futures speculators or the “dumb money” (the red line under the chart) have built a massive long position in WTI crude oil of just under 500,000 net futures contracts. There is a very real risk that these speculators will be forced to liquidate if the sell-off continues, which would greatly exacerbate the sell-off.

Crude Oil Monthly

Crude oil is an economically sensitive asset and may be selling off as it prices in the rising risk of a recession in the not-too-distant future.

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more. 

Here’s What To Watch In Crude Oil Right Now

After experiencing weakness in February and March, crude oil spiked to three-year highs in April due to geopolitical fears associated with the Syria bombing campaign as well as falling inventories. Earlier today, President Trump tweeted that OPEC was to blame for “artificially Very High!” crude oil prices, which he said are “No good and will not be accepted!” In this piece, we will look at key technical levels and other information relevant for understanding crude oil prices.

Since the summer of 2017, crude oil has been climbing a series of uptrend lines, but broke below one of these lines during the market rout of early-February 2018. WTI crude oil broke above its $66-$67 resistance last week, which is a bullish technical signal if it can be sustained. If WTI crude oil breaks back below this level, however, it would be a bearish sign.WTI Crude Daily

A major reason for skepticism about crude oil’s recent rally is the fact that the “smart money” or commercial futures hedgers currently have their largest short position ever – even larger than before the 2014/2015 crude oil crash. The “smart money” tend to be right at major market turning points. At the same time, the “dumb money” or large, trend-following traders are the most bullish they’ve ever been. There is a very good chance that, when the trend finally changes, there is going to be a violent liquidation sell-off.

WTI Crude Monthly

Similar to WTI crude oil, Brent crude has been climbing a couple uptrend lines as well. The recent breakout over $71 is a bullish sign, but only if it can be sustained; if Brent breaks back below this level, it would give a bearish confirmation signal.

Brent Crude Daily

It is worth watching the U.S. Dollar Index to gain insight into crude oil’s trends (the dollar and crude oil trade inversely). The dollar’s bearish action of the past year is one of the main reasons for the rally in crude oil. The dollar has been falling within a channel pattern and has recently formed a triangle pattern. If the dollar can break out of the channel and triangle pattern to the upside, it would give a bullish confirmation signal for the dollar and a bearish signal for crude oil (or vice versa). The “smart money” or commercial futures hedgers are currently bullish on the dollar; the last several times they’ve positioned in a similar manner, the dollar rallied.

USD Weekly

The euro, which trades inversely with the dollar and is positively correlated with crude oil, is also worth watching to gain insight into crude oil’s likely moves. The “smart money” are quite bearish on the euro, which increases the probability of a pullback in the not-too-distant future. The euro has been rising in a channel pattern and has recently formed a triangle pattern. If the euro breaks down from this channel, it would give a bearish confirmation signal, and would likely put pressure on crude oil (or vice versa).Euro Weekly

There has been a good amount of buzz about falling inventories and the reduction of the oil glut, but this week’s inventories report of 427.6 million barrels is still above average for the past 5 to 10 years. In addition, U.S. oil production continues to surge and recently hit an all-time high of 10.5 million barrels per daily.

For now, the short-term trend in crude oil is up, but traders should keep an eye on the $66-$67 support zone in WTI crude oil and the $71 support in Brent crude oil. If those levels are broken to the downside, then the recent bullish breakout will have proven to be a false breakout. Traders should also keep an eye on which way the U.S. dollar and euro break out from their triangle and channel patterns.

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The Mind Numbing Spin Of Peter Navarro

“The market is reacting in a way which does not comport with the strength, the unbelievable strength in President Trump’s economy. I mean, everything in this economy is hitting on all cylinders because of President Trump’s economic policies. We’ve cut taxes. That’s stimulating investment in a way which will be noninflationary. That’s going to drive up productivity and wages. That’s all good.” -Peter Navarro

Unfortunately, as much as we would like to believe that Navarro’s comment is a reality, it simply isn’t the case. The chart below shows the 5-year average of wages, real economic growth, and productivity.

Notice that yellow shaded area on the right.  As I wrote previously:

“Following the financial crisis, the Government and the Federal Reserve decided it was prudent to inject more than $33 Trillion in debt-laden injections into the economy believing such would stimulate an economic resurgence. Here is a listing of all the programs.”

If $33 Trillion dollars didn’t “unleash” the U.S. economy, or even change the trends of the prior years, there should be serious doubt that just reducing some outdated regulations, giving corporations a tax cut, and engaging in a “trade war” with China is going to be the fix. But nonetheless, here goes Navarro:

“We’ve got an unleashing, historically, of the energy sector, which is going to drive down costs to the American manufacturers–make them competitive even as it drives down costs to consumers, and allows them to spend more and get more out of their dollar.”

Wait a second.

Read carefully what Navarro said. By unleashing the energy sector the supply of oil will increase, lowering the price of oil, which is an input into manufacturing thereby lowering their costs.

This is a good thing?

Let’s dissect his statement. The decline in energy costs may be beneficial to parts of the economy, but we must remember it is offset because of the drag from the energy sector which loses revenue on each barrel of oil. As we have discussed many times previously, the energy patch is a huge CapEx contributor and also provides some of the highest wage paying jobs. As we found out previously, energy is a much bigger contributor to the health of the economy than not.

However, according to Navarro, the decline in oil alone will make manufacturing more competitive in the global marketplace. If that were true, wouldn’t the U.S. already be a leading competitive manufacturer considering oil has plunged over the last few years from over $100/bbl to the low $30’s? Furthermore, following Navarro’s logic, wages should have skyrocketed.

None of those things happened.

Navarro isn’t done yet.

“In terms of trade policy, by reducing the trade deficit, which is the intent of the president’s fair and reciprocal trade policies, that will add thousands of jobs to this economy; and bring in foreign investment. I mean, when we put the tariffs on solar and washing machines in January, that brought in a flood of new investment.”

We do indeed have a trade deficit because there are 300+ million American’s demanding cheaper foreign goods and services than there are foreigners demanding our exports.

While people rail about the amount of goods that we import, the simple reality is that we “export” our deflation and import “deflation.” We do this so we can buy flat screen televisions for $299 versus $2999 if they were made in America. The simple problem is that American workers demand higher wages, vacation, health care, benefits, leave, etc. all of which increase the costs of goods made in America. Not to mention the additional costs born by goods and services producers to comply with the myriad of regulations from EPA to OSHA. A previous interview of Greg Hayes, CEO of Carrier Industries, made this point very clearly.

So what’s good about Mexico? We have a very talented workforce in Mexico. Wages are obviously significantly lower. About 80% lower on average. But absenteeism runs about 1%. Turnover runs about 2%. Very, very dedicated workforce.

Which is much higher versus America.  And I think that’s just part of these — the jobs, again, are not jobs on an assembly line that people really find all that attractive over the long term.

This leads to the “American Conundrum.” While we believer our “labor” is worth “MORE” than anywhere else in the world, we also want to “buy” cheap products.

In order for that equation to work companies must “export” our “inflation.” This is accomplished by off-shoring labor at substantially lower rates which allows products and services to be provided more cheaply (deflation) to fill American demand. As I wrote yesterday, there is little ability for Americans to absorb the higher costs of goods and services brought about through “tariffs” or other inflationary goals of “balancing trade.”

“The chart below shows is the differential between the standard of living for a family of four adjusted for inflation over time. Beginning in 1990, the combined sources of savings, credit, and incomes were no longer sufficient to fund the widening gap between the sources of money and the cost of living. With surging health care, rent, food, and energy costs, that gap has continued to widen to an unsustainable level which will continue to impede economic rates of growth.”

Of course, while Navarro is optimistic that Trump policies will generate a net creation of a few thousand jobs, such aspirations will fall far short of what is needed to balance the economy.

But honestly, you can’t make up his last statement.

So you wonder–and if I put my old hat on as a financial market analyst, I’m looking at that – this market and the economy and thinking, the smart money will buy on the dips here because the economy is as strong as an ox.”

One chart dispels that notion.

So, be careful taking financial advice from Peter Navarro as well.

But, let me defer to my friend Doug Kass:

“To me, the views that animate Navarro’s policy prescriptions demonstrate his economic illiteracy.

There is no inverse relationship between imports and GDP as Navarro asserts.

In fact, there is a strong positive relationship between changes in trade deficits and changes in GDP.

Both Navarro and Ross are proponents of steel tariffs. As I have mentioned, such tariffs hurt producers that utilize steel products much more than they benefit a smaller population of steel producers. The byproduct of which could be rising steel costs which may ripple throughout the economy.

In reality, the US depends on China – we are in a flat, networked and interconnected global economy:

  1. The Chinese export market is important to the U.S.
  2. China produces low cost goods that benefit American consumers.
  3. China funds our budget deficit, their surplus of savings is imported to the US – squaring the circle. If China stops buying our Treasuries, where do we get funding?

Misguided Policies Continue

For the last 30 years, each Administration, along with the Federal Reserve, have continued to operate under Keynesian monetary and fiscal policies believing the model works. The reality, however, has been that most of the aggregate growth in the economy has been financed by deficit spending, credit expansion and a reduction in savings. In turn, this reduced productive investment in the economy and the output of the economy slowed. As the economy slowed and wages fell the consumer was forced to take on more leverage which also decreased savings. As a result of the increased leverage more of their income was needed to service the debt.

Secondly, most of the government spending programs redistribute income from workers to the unemployed. This, Keynesians argue, increases the welfare of many hurt by the recession. What their models ignore, however, is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment.

All of these issues have weighed on the overall prosperity of the economy and it citizens. What is most telling is the inability for people like Navarro, and many others, who create monetary and fiscal policies, to realize the problem of trying to “cure a debt problem with more debt.”

This is why the policies that have been enacted previously have all failed, be it “cash for clunkers” to “Quantitative Easing”, because each intervention either dragged future consumption forward or stimulated asset markets. Dragging future consumption forward leaves a “void” in the future that has to be continually filled, and creating an artificial wealth effect decreases savings which could, and should have been, used for productive investment.

The Keynesian view that “more money in people’s pockets” will drive up consumer spending, with a boost to GDP being the end result, has been clearly wrong. It hasn’t happened in 30 years.

The Keynesian model died in 1980. It’s time for those driving both monetary and fiscal policy to wake up and smell the burning of the dollar and glance at the massive pile of debts that have accumulated.

We are at war with ourselves, not China, and the games being played out by Washington to maintain the status quo is slowing creating the next crisis that won’t be fixed with another monetary bailout.

Weekend Reading: Failing To Plan Is Planning To Fail

Failing To Plan Is Planning To Fail

by Michael Lebowitz, CFA

There is a durable bit of market wisdom that states “volatility begets volatility.” The gist of the saying is that at times the market can be very calm producing little need for investors to worry. Other times sharp market movements produce anxiety that spreads among investors and tends to exaggerate market moves in both directions for a while.

The graph below shows the daily percentage change between intraday highs and lows. Plain to the eye one can see the period of unprecedented calm that prevailed in the markets throughout 2017 as well as the sudden bout of volatility that picked up in earnest in late January.

Sailors pay close attention to weather conditions at all times. Importantly, however, they need to be highly in tune with the warnings that Mother Nature presents. This doesn’t mean they must head to harbor immediately. It does mean however they must have a plan or two top of mind if the conditions continue to worsen.

Protecting your wealth is no different. When the markets get choppy, as they have been, we need to heed the message that conditions have changed. One should not sell everything and run to cash. However, it is imperative one has a strategies and actionable triggers in place in case the volatility continues.

Last weekend, Lance Roberts shared the following graph and commentary:

“Considering all those factors, I begin to layout the “possible” paths the market could take from here. I quickly ran into the problem of there being “too many” potential paths the market could take to make a legible chart for discussion purposes. However, the bulk of the paths took some form of the three I have listed below.”

No one knows where this market is going and if they tell you otherwise, they are lying. We simply remind you the market winds are picking up, it is time to put a plan in place. Fear and anxiety are the enemy of complacent and unprepared investors. Those emotions are the direct result of not having considered and planned for the unexpected. For the investor who exercises the prudence to strategize on the “what if” and keep a close eye on market conditions, the fear of others’ is his opportunity.

Consider this recent period of choppy seas a gift. The market is allowing you time to plan.

“Failing to plan is planning to fail” –Alan Lakein

Weekend Reading: The Fed’s Dilemma

The Fed’s Dilemma

The confusion at the Fed continues.

On Wednesday, Jerome Powell justified hiking rates 0.25%, while maintaining their projections of two further hikes this year, by painting an upbeat picture of the U.S. economy.

Such may have been the case in January when the Atlanta Fed sent the current Administration into a “tizzy” with a pronouncement of 5.4% economic growth in the 4th quarter, but not at 1.9% currently. Furthermore, as I discussed just recently:

“Since 1992, as shown below, there have only been 5-other times in which retail sales were negative 3-months in a row (which just occurred). Each time, the subsequent impact on the economy, and the stock market, was not good.”

“So, despite record low jobless claims, retail sales remain exceptionally weak. There are two reasons for this which are continually overlooked, or worse simply ignored, by the mainstream media and economists.

The first is that despite the “longest run of employment growth in U.S. history,” those who are finding jobs continues to grow at a substantially slower pace than the growth rate of the population.”

“Secondly, while tax cuts may provide a temporary boost to after-tax incomes, that income boost is simply being absorbed by higher energy, gasoline, health care and borrowing costs. This is why 80% of Americans continue to live paycheck-to-paycheck and have little saved in the bank.”

The Fed’s dilemma is quite simple.

The Fed must continue to “jawbone” the media and Wall Street as economic growth has continued to remain sluggish. As shown, the Fed continues to remain one of the worst economic forecasters on the planet.

While the Fed is currently “hopeful” of a stronger 2018 and 2019, they are likely once again going to be very disappointed. But in the short-term, they have little choice.

Unwittingly, the Fed has now become co-dependent on the markets. If they acknowledge the risk of weaker economic growth, the subsequent market sell-off would dampen consumer confidence and push economic growth rates lower. With economic growth already running at close to 2% currently, there is very little leeway for the Fed to make a policy error at this juncture.

The Federal Reserve has a very difficult challenge ahead of them with very few options. While increasing interest rates may not “initially” impact asset prices or the economy, it is a far different story to suggest that they won’t. In fact, there have been absolutely ZERO times in history that the Federal Reserve has begun an interest-rate hiking campaign that has not eventually led to a negative outcome.

The Fed understands economic cycles do not last forever, and after nine years of a “pull forward expansion,” it is highly likely we are closer to the next recession than not. From the Fed’s perspective, hiking rates now, even if it causes a market decline and/or recession, is likely the “lesser of two evils.”

Crude Oil Breaks Out, But Will It Last?

For the past several weeks, I’ve been watching triangle patterns form in crude oil after its slide in early-February. Breakouts from triangle patterns often lead to important directional moves, which is why I believe it is worthwhile to pay attention to these formations. Both WTI and Brent crude oil finally broke out of their triangle patterns today due to Middle East tensions and speculation regarding more cuts in Venezuelan output.

Here’s West Texas Intermediate crude oil’s breakout:

WTI Crude Daily

Here’s Brent crude oil’s breakout:

Brent Crude DailyWhile I believe in respecting price trends instead of fighting them, I’m still concerned about the fact that crude oil’s rally of the past two years has been driven by “dumb money” or large speculators, who are more aggressively positioned than they were in the spring of 2014 before the oil crash. At the same time, the “smart money” or commercial hedgers have built their largest short position in history.

WTI Crude Monthly

Last week, I showed that U.S. Treasuries had broken out of triangle patterns of their own. Crude oil’s recent bullish move has been threatening the Treasury breakout (the two markets trade inversely):

30 Year Bond

10 Year Note

The U.S. Dollar Index is worth paying attention to when analyzing the crude oil market. Bullish moves in the dollar are typically bearish for crude oil and other commodities, and vice versa. Today’s bullish crude oil move and breakout is not confirmed by the U.S. Dollar Index, which is up .64 percent today. The U.S. Dollar Index has been trading in a directionless manner for the past two months, but its next major trend is likely to affect crude oil. If the Dollar Index can break above its trading range and downtrend line, it would likely lead to further bullish action (which would hurt crude oil). If the Dollar Index breaks down from its trading range, however, it would likely lead to further bearish action (which would push crude oil higher).

Dollar Daily

The longer-term U.S. Dollar Index chart shows that it is trading in a downward-sloping channel pattern. The dollar will remain in a downtrend as long as it trades within this channel. A breakout from this channel would increase the probability of a rebound, which would hurt crude oil. As I’ve been showing, the “smart money” or commercial hedgers are bullish, while the dumb money are bearish.

Dollar Weekly

This is an admittedly confusing time in the financial markets: correlations are breaking down, many technical breakouts and breakdowns are failing and whip-sawing, and the market is chopping all over the place. For these reasons, I’m not making any short-term market predictions, but just showing key charts that I believe are worth paying attention to. Yes, I believe they must be taken with a healthy grain of salt. I am suspicious of today’s crude oil breakout because it’s not confirmed by the U.S. dollar and because of the large bearish position held by the “smart money.” The smart money are usually right in the end, but it’s not prudent to fight the trend in the short-term. As usual, I will keep everyone posted regarding the recent crude oil and Treasury bond breakouts.

Please follow or add me on TwitterFacebook, and LinkedIn to stay informed about the most important trading and bubble news as well as my related commentary.

Weekend Reading: Our Ersatz Economy

Chart of the Day

Today’s chart of the day shows cumulative U.S. GDP growth minus federal debt issuance. Most studies and discussions of U.S. economic growth assume that it’s natural, organic, and sustainable, but the reality is that it’s largely juiced by deficit spending (particularly since the Great Recession). According to Peter Cook, CFA:

The cumulative figures are even more disturbing. From 2008-2017, GDP grew by $5.051 trillion, from $14.55 trillion to $19.74 trillion.  During that same period, the increase in TDO totaled $11.26 trillion.  In other words, for each dollar of deficit spending, the economy grew by less than 50 cents.  Or, put another way, had the federal government not borrowed and spent the $11.263 trillion, GDP today would be significantly smaller than it is.

Cumulative GDP growth less Fed. debt issuance

How much longer can we continue juicing economic growth like this? The U.S. federal debt recently hit $20 trillion and is expected to hit $30 trillion by 2028. Despite what Modern Monetary Theorists (MMTers), Keynesians, and similar schools of thought claim, common sense dictates that the endgame is not far off.

Have Treasury Yields Peaked for 2018? BMO Thinks So (Bloomberg)

Strong Demand For 30Y Paper Shows No Shortage Of Buyers Amid Surge In Issuance (ZeroHedge)

Gundlach Says 10-Year Treasury Above 3% Would Drive Down Stocks (Bloomberg)

SP500 performance around Fed tightening cycles (The Macro Tourist)

Dodd-Frank Rollback Optimism Hands Bank ETFs Record Inflows (Bloomberg)

FANG Rally Is Outpacing the Heyday of the Tech Frenzy (Bloomberg)

Apple is inching towards a $1 trillion valuation (Business Insider)

Buying Stocks Now Is Betting On Buybacks (Forbes)

Record Stock Buybacks at Worst Possible Time (Mike “Mish” Shedlock)

4 Reasons To Sell Tesla Stock (Forbes)

Everything is shrinking at GE except its massive debt (CNN Money)

Remembering Bear Stearns & Co (Institutional Risk Analyst)

A Worrying Shift for U.S. Pensions: Retirees Will Soon Outnumber Kids (Bloomberg)

The Coming Pension Crisis – Part I, Part II (Daily Reckoning)

The U.S. Retirement Crisis: The Elderly are Broke (Gold Telegraph)

The stock-market correction may be only half over, if history is any guide (MarketWatch)

JPMorgan Moves Closer to Urging a Rotation Away From Equities (Bloomberg)

Bullish On Oil Because of Trump? Don’t Be! (Mike “Mish” Shedlock)

What Event Will Sink the Stock Market? Yields? Tariffs? Trump? (Mike “Mish” Shedlock)

The Netflix Bubble (Seeking Alpha)


Economy

The U.S. Inflation Scare May Be Over (Bloomberg)

Subdued CPI Disappoints Economic Illiterates (Mike “Mish” Shedlock)

Yield-Curve Flattening Gets New Life After Inflation Fears Subside (Bloomberg)

10 years after the financial crisis, have we learned anything? (CNN Money)

Cramer on 2008 crisis: It could happen again ‘because no one went to jail the first time’ (CNBC)

A Decade After Bear’s Collapse, the Seeds of Instability Are Germinating Again (Wall Street Journal)

U.S. CEO Optimism Hits Record (Bloomberg)

Yield Curve Turns Threatening – Again (DollarCollapse.com)

Fed Admits ‘Yield Curve Collapse Matters’ (ZeroHedge)

It’s Just Starting: Moody’s Warns A Deluge Of Retail Bankruptcies Is Coming (ZeroHedge)

Economist Lacy Hunt: These Conditions Preceded The Last 7 Recessions (Forbes)

Subprime Auto Bonds Caught in Vise of Rising Costs, Bad Loans (Bloomberg)

Goldman, Atlanta Fed Slash Q1 GDP Forecasts Below 2.0% (ZeroHedge)

America’s inflation problem isn’t high wages, it’s high rent (MarketWatch)

Investors “Unconcerned” About Record Corporate Debt (Dollar Collapse.com)

Trillion-Dollar Deficits Far as the Eye Can See (Daily Reckoning)

The Everything Bubble – Waiting For The Pin (David Stockman)

Is The U.S. Economy Really Growing? (Peter Cook, CFA)

Why It’s Right To Warn About A Bubble For 10 Years (Jesse Colombo)

Are U.S. Treasury Bonds Breaking Out? (Jesse Colombo)

BTFD or STFR? (Michael Lebowitz)

Technically Speaking: Chart Of The Year? (Lance Roberts)

March Madness For Investors (Michael Lebowitz)

Is The Dot.Com Bubble Back? (Lance Roberts)

Volatility Is Back (John Coumarianos)